When he passed away in 2006, Milton Friedman was rightly mourned by all, but by none more so than libertarians.  To us, he was nothing short of a hero.  His Capitalism and Freedom has become a classic in defence of both economic and civil freedoms.  In Counter-Revolution in Monetary Theory, he wrote the oft-quoted principle behind monetary policy:

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.

These words, sadly, seem to have been lost on the vast majority of economics students today.

I’ve never claimed to have any high expectations of my fellow economics students.  In fact, I barely mask by outright contempt for the vast majority of them, who fill their otherwise empty heads with propaganda spouted by the leftist lecturers in the hope that it’s their passport to a job at an investment bank.  Today took the biscuit for sheer stupidity.

In a hall of over 200 second-year economics students, not a single person ventured the correct answer to the question, “In medium-run equilibrium, what is the inflation equal to?”  OK, I’m sure some people knew the answer but couldn’t be arsed to say it.  After all, I was in the class myself, but I far too interested in seeing long it would be, and how many ridiculous answers would be proffered, before we’d somebody would guess the right one (I have to get inspiration and amusement somehow!).

It was a long time.  One third-year student, with a job at a top investment bank waiting for him on graduation, thought that it was the same as equilibrium output.  Inflation and GDP are the same?  God, help us all…

Of course, Milton Friedman was right.  By the Fisher equation, inflation is the growth of the money supply above what the real economy can support.  If the money supply increases by 5%, but GDP increases by only 3%, inflation will be 2% [Very roughly.  I’m taking some liberties, but not nearly as many as the aforementioned halfwits].  This very simple relation is lost on a year of student economists.

Judging by the Daily Mail’s front page on Tuesday, it’s a relation lost on far more.  Apparently, we can cure all our woes by reducing interest rates.  By reducing the interest rate, the government increases the money supply, leading to spiralling inflation as outlined above.  That’s a good solution for the Daily Mail’s readership of home owners, who beg for government-induced inflation to pay off their huge mortgages for them, but it’s pretty shitty for the rest of us, and, in the long-run, the economy as a whole.

If one assumes that the state does have a role in controlling the currency (and there are sound economic arguments against it), the Bank of England’s first priority should be defend the value of the currency that it requires its citizens to hold as sacrosanct.  They’re bankers: their job is to keep money safe, and that means not destroying its value.

To do that requires a knowledge of monetary theory that is sadly lost on them, on the Daily Mail, and, judging by the current crop of UCL undergraduates, on the next generation of hedge-fund managers.

On Wednesday, the Kremlin reinstituted price controls on a range of agricultural products in an attempt to control runaway inflation. Those words, in and of themselves, should strike fear into the hearts of the most indomitable men. Certainly, they do mine.

To counter what Vladimir Putin believes to be politically-unacceptable food prices, the government has slapped price controls on bread, cheese and milk, eggs, sugar, and vegetable oil. In this way, the government now controls, directly and immediately, the prices of all the major staple non-meat food products in Russia.

The government claims this to be a ‘voluntary’ agreement with companies, but this - as almost all claims of innocence by the Russian government - is a sham. One only has to look at the way that oil giants Yukos and Russneft were taken over by the Kremlin or pro-Kremlin lackeys to see what ‘voluntary’ means in Putin’s Russia.

There is no opacity to this ploy. The scheme is clearly and undeniably an attempt by Putin’s government to curry favour with the Russian electorate ahead of parliamentary elections in December by employing what are cynical and economically-misguided populist measures.

It doesn’t take a genius to work out that price controls can’t possibly work. Let’s say, for the sake of argument, that Putin’s premise is right: that prices are ‘too’ high. High prices come about because there is an excess of demand over supply. The institution of price controls only works when they reduce the price paid for by the market. This, of course, increases demands and further restricts supply.

Hence, price controls are self-defeating: driving up the natural market prices, reducing economic output, and creating an official rate-market rate price differential that is exploited by the black market. Price controls don’t work. They don’t respect the rights of the individual. They belong in the Soviet era of direct economic control. They have no place in a free society.

Ayn Rand’s novel We the Living, published 70 years ago, focuses the outcome of price controls, of rationing, and similarly motivated and similarly ill-reasoned policies. What followed, in fiction and in history, was a catastrophic nightmare for Russia then. Unless this government or the next is willing to step back from the edge and reverse this Soviet-esque policy, there can be no surprise when Russia once again finds itself facing catastrophe.

When most people hear that I study economics, they say, “Oh, a good, solid, libertarian subject”.  However, having been rejected by Cambridge after trying to teach Partha Dasgupta* about the Laffer curve, I don’t exactly hold my own subject in the highest of regards.

Today’s ‘Macroeconomic Theory and Policy’ tutorial kinda proved my point.

[The government] printing money has no negative effect on the economy: only good.  In the Western system, with the separation of politicians from central banks, this is not possible.  However, [PR] China, which is my country, we have this without negative effects.

Squeamish Westerners.  If only our government was more like the Chinese and risked over-inflating our economy just as theirs has done.  And if only our government was more hard-nosed and cared as little about deliberately keeping down the value of private assets as they did over there.  Darn bourgeois property rights getting in the way of sound economics…

A balanced budget policy cannot help an economy in a depression.  In a depression, the revenue goes down, but expenditure goes up, because unemployment benefits go up.  Thus, to try to balance the budget makes a bad situation even worse.  That’s stupid for the government to do so, because it relies on the government cutting spending or raising tax.

Yes, balanced budgets are incredibly stupid.  After all, we’ve already established that running a structural budget deficit is no problem, so long as the government is capable of printing its way out of trouble.  Just to correct my tutor here, if the economy is as described, the best way a government can correct its deficit is exactly to balance the budget: by scrapping the afore-mentioned unemployment benefit and getting people back to work and back paying taxes to fund the government’s assumed largesse.

After my scrape at Cambridge, I sometimes wonder if not knowing the first thing about economic public policy is considered a requisite ‘talent’ for teaching the subject in our universities.

*A lefty development economist who is (and this is not unrelated to the first factor) nailed-on for the Nobel Prize.

Were the average person to look at one of this year’s new £20 Bank of England banknotes, it may seem a tad confusing for him or her to find a reference to a factory manufacturing pins. In the Wealth of Nations, Adam Smith, the father of modern economics, describes the economic concept of division of labour, by which each person specialised in a particular task and several people combined these respective products to increase efficiency, in terms of what he saw at the time: pin-making.

Nowadays, we find the example risible not because it doesn’t hold the same basic economic fact that it did when Smith wrote it in 1776, but because it seems so trivial, so small-scale. Today, we would see the smallest examples of division of labour all around us, but nowhere more so than on the production line. So much do we take the awesome productive power of the production line for granted, that we forget that there was once a time where no such innovation existed.

In the early summer of 1903, there were few more nervous men in Detroit, nay the whole of the United States, than Henry Ford, the majority proprietor and name-bearer of a small automobile-building factory. Ford had sunk his entire fortune into the enterprise: an enterprise that was down to its last few dollars. No-one had yet ordered one of his ‘Model A’s, and the company was going under.

However, salvation for the company came on 23 July 1903, in the form of a German doctor in Chicago, Dr Ernst Pfenning, who took a chance on Ford, and ordered one (out of self-interest, mind!). It would be the first of 1,750 produced over the following year. From then on, it was to bigger and better things that Ford aspired to and attained, culminating in the dominance of the Ford Model T. Ford introduced a style of industrialism based on the large-scale division of labour, centred on the production line that had been pioneered by Eli Whitney, that bears his name: Fordism.

If the sum of man’s accomplishments can be measured by the sum of his products, there can be few men that have ever achieved more than Ford. The cornerstone of the new Fordist economic order, the production line, unleashed the capacity of people to produce in a way never seen before. Had Ford’s factories been around in 1776, there can be no doubt that it would be the car factory, and not the pin factory, that would be recorded as Adam Smith’s archetypal division of labour, and the mainstay of the new economic order.